Attorney Recommends Revising Penalty Protection Rules in Proposed Regs on Practice Standards

b. Does the transaction have a "significant" tax avoidance purpose?

c. If the transaction does have a significant purpose of tax avoidance, can Lawyer's less than MLTN opinion be a "reliance opinion" for § 10.35 purposes?

b. Does it matter why § 10.35 is inapplicable -- e.g., because not a significant tax avoidance purpose v. less than MLTN conclusion?

c. What can (or must) Lawyer say in the opinion regarding penalty protection?

b. If the transaction is not a "tax shelter," is protection afforded by either the "substantial authority" or "adequate disclosure/reasonable basis" exceptions articulated in section 6662(d)(2)(B)?

c. If the transaction is a tax shelter, or if neither the "substantial authority" nor "adequate disclosure/reasonable basis" exceptions applies, can Client satisfy the "good faith/reasonable cause" exception of section 6664(c) via reliance on Lawyer's opinion? Does it matter that Lawyer participated in the structuring of the transaction? What if (i) Client is a corporation as opposed to a non-corporate taxpayer? or (ii) the transaction involves estate and gift or generation-skipping tax as opposed to income tax?

d. Is Client's reliance on Lawyer's opinion necessarily precluded if the written advice, even though thorough and well-reasoned, contains a standard Circular 230 penalty avoidance disclaimer?

b. When should a MLTN or higher conclusion be required?

c. When might a less than MLTN conclusion suffice? What specific lower thresholds are acceptable, and in what circumstances?

d. What correlation should exist between the requisite form and quality of penalty protection advice from the taxpayer's perspective and the Circular 230 practitioner standards with respect to rendering such advice?

e. In what circumstances, if any, might reliance on highly informal written advice or oral advice be sufficient for penalty protection purposes?

f. Should the same penalty avoidance principles and rules apply with respect to income tax and non-income tax matters?

b. Marketed opinions currently are limited under Circular 230 to the "third-party marketing" context. At least for purposes of identifying scenarios in which MLTN advice is required, consideration should be given to including not only "third-party marketing," but also so-called "self-marketing" advice provided directly by the practitioner or firm colleagues to multiple clients. This possibly could be done without extending the "covered opinion" definition to "self-marketing," a previously considered approach which presumably would stir much controversy if revisited.

c. The regulations should address whether, and in what circumstances, MLTN advice that is not fully compliant with Circular 230 may nonetheless provide penalty protection. (See par. 5.a, below.)

b. It might be appropriate to relax the MLTN rule for non-RAT "tax shelters" as well, particularly if the "significant purpose" definition is not administratively softened along the lines suggested in par. 3.a, above.

c. If not a "tax shelter," a "reasonable basis" opinion should also be acceptable -- though as suggested in par. 7, below, it may make sense to morph the "reasonable basis" and "realistic possibility" concepts into a single standard.

d. Consistent with the post-2004 version of section 6662(d)(2), the regulations should be revised to reflect that the special penalty avoidance rules for "tax shelters" are no longer limited to corporate taxpayers.

b. Depending on the nature and complexity of the transaction and the potential tax issues involved, and perhaps also on the taxpayer's level of sophistication and historic relationship with the particular adviser, there may be situations in which a highly informal written communication could suffice (e.g., a brief and essentially conclusory e-mail) -- again, even where the requisite Circular 230 content may be lacking. If Treasury is willing to leave open that possibility, the regulations should so state and spell out the minimum required elements of any such communication.

b. For purposes of avoiding the return preparer penalty, Treas. Reg. § 1.6694-2(b)(1) defines "realistic possibility" as a 33-1/3% greater chance of winning on the merits in court. That standard also appears in § 10.34 of Circular 230, as a legal diligence requirement for both signing return preparers and practitioners who advise on return positions.

c. Consideration should be given either to (i) quantifying the level of confidence contemplated by the "reasonable basis" standard (e.g., at 20% or 25%); or (ii) simply equating it with the 33-1/3% "realistic possibility" standard. From a policy perspective, it does not seem unreasonable to expect a taxpayer to bear the penalty risk for a position that knowledgeable tax counsel thinks would definitely or most probably be rejected by a court.

b. If reliance on oral advice is acceptable in particular circumstances, but a rule were also adopted requiring an affirmative "intended for penalty protection" statement in written advice (see par. 2, above), an appropriate exception to that rule would have to be crafted. In addition, a rule expressly permitting reliance upon highly informal written advice (e.g., a purely conclusory email) would also seem necessary (see par. 5.b, above).

c. The regulations under section 6694 should specifically address whether, and in what circumstances, a return preparer can meet the new (and quite controversial) statutory penalty avoidance thresholds without rendering written advice or relying on written advice from another professional.